Another Disappointment for the Cannabis Industry as Rescheduling Delayed

The cannabis industry has waited with bated breath for the December 2nd hearing, where many anticipated that final testimony in favor of rescheduling would be heard by the Drug Enforcement Agency (DEA). The hope was that this would lead to an expedited rescheduling, and perhaps IRC §280E might not apply to the tax year ending 2024 (or at least all twelve months of 2025). Unfortunately, it no longer appears that testimony will be given on that date and rescheduling will remain unresolved until the close of the calendar year.

DEA Chief Administrative Law Judge John Mulrooney II has issued an order informing participants hoping to give testimony that they should instead be prepared to present at an in-person hearing in either January or February 2025. Judge Mulrooney is reportedly seeking “further clarification regarding the participant’s positions and how they would be sufficiently adversely affected or aggrieved” by a rescheduling in advance of the final hearing. Parties hoping to testify will have until November 12^th to provide support for their testimony. If they cannot prove to the judge’s satisfaction that they are an “interested person” (as defined by federal regulations) then they would not be permitted to testify at the final in-person hearing. At present, 25 persons and organizations have been invited to testify; many in opposition of rescheduling.

While this development is disappointing to many, it is not entirely surprising. The U.S.’ scheduling of cannabis has endured since its original determination in 1970, despite the significant accumulation of scientific evidence to support a change. This year’s heavily contested presidential election also factored into the decision to delay the hearing as a new administration might push the government away from rescheduling and towards other political priorities.

For those optimistic that rescheduling might happen in 2024, and who may have not remitted their 2024 quarterly income tax estimated payments to date, this announcement means that a deposit will now be advisable for the fourth quarter. Depending on each company’s individual situation, additional planning might also be required.

As a reminder, Internal Revenue Code §280E states that:

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

This provision dramatically increases the effective tax rate on state-legal cannabis businesses by denying them the privilege of deducting selling, general and administrative costs when calculating their taxable income. While some relief has come in recent years with state-level decoupling from adherence to this provision, the IRS has remained steadfast in its position that only Congressional action or rescheduling would relieve the cannabis industry from the wrath of §280E.

Authors: Ray Owens, CPA, MST | [email protected]